Real Estate

As part of a broadly diversified investment portfolio, passive real estate makes sense for many near retirees. Some are folks who own income-generating rental properties, for instance. They enjoy the cash flow, but are past the life stage where they’re okay with phone calls at 3 a.m. from tenants with HVAC issues. Others don’t own private equity real estate, but should. Owning-highly correlated investments isn’t a wise way to start retirement. Passive real estate usually has low correlation with financial markets.

“People planning for retirement should know investment properties have the potential to generate monthly income and appreciation as part of a diversified portfolio of stocks, bonds and alternative investments,” says Dwight Kay, founder and CEO of Torrance, Calif.-based Kay Properties and Investments.

“Investment properties, as a class, are not correlated to the stock market, which is one reason to include them in a diversified investment portfolio. Of course, diversification does not guarantee appreciation or protection against losses, although many believe it is a prudent investment strategy.”

Several alternatives

Those seeking to build a passive real estate investment portfolio for retirement planning can pursue one of several avenues, Kay says.

Real Estate Investment Trusts (REITs) are the first of those options. Some of those building a retirement investment portfolio buy into the REIT market through their stock brokerage accounts and retirement plans.

A REIT is a company that owns, operates or finances real estate generating a steady stream of income for investors. The real estate can be in multifamily rental properties, hotels, distribution centers, shopping malls, office buildings, medical centers, data centers, cell towers and more. Like a mutual fund, A REIT is comprised of a basket of investments, in this case real estate investments. Investors are able to earn dividends from investments in real estate. But they’re freed from the chore of buying, managing or financing any property. In addition, most REITs are traded like stocks. That means unlike holdings in physical real estate, REITs are exceptionally liquid. The negative to REITs is inability to defer taxation on capital gains from sales of shares. When REIT shares are sold, the seller must pay capital gains tax on any gains.

Delaware Statutory Trusts (DSTs) are a form of direct real estate ownership. Industrial, multifamily, self-storage, medical and retail are among the real estate types that can be owned within a DST. The properties are often institutional quality, not unlike properties owned by pension funds and insurance companies. Day-to-day care of the property is handled by an asset manager, who oversees all investor reporting and monthly distributions. Capital gains in DSTs can be deferred as long as the gains are reinvested in other properties. Reinvestments take place in 1031 exchanges.

Who uses DSTs? Cash investors with $25,000 or more to invest, as well as investors who seek a replacement property as part of a tax-deferred 1031 exchange solution.

Tenants-in-Common Properties, or TICs, allow investors to own a fractional interest in a property. Investors receive a pro rata share of the future income and appreciation of the real estate. TIC investors generally are able to vote on property issues. Among those could be whether the property should be refinanced or sold. TIC investments and DSTs are different, but often hold the same kinds of properties, and both qualify for 1031 exchange tax treatment.  

Investors in passive real estate investments can reduce risk by diversifying across asset types and geographies, by seeking fractional ownership of investment properties and avoiding highly-volatile asset classes, such as hotels, senior living facilities and oil and gas-related properties, which carry higher risk than other property types.

Investing in real estate doesn’t necessarily mean taking on a lot of debt, Kay says. There exists a range of professionally-managed real estate investment vehicles, such as those just described, that have little or no leverage. “Leverage is not always necessary to generate attractive returns,” he says.